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The Fed is Done Raising Rates
by Dr. Steve Sjuggerud
August 8, 2006

The U.S. Federal Reserve has raised interest rates 18 times since June of 2004… bringing us an interest rate of 5.25%.

The big question in the markets this week is… Is the Fed finished?

The answer is yes…

This is not a bold prediction by me… it’s simply what the markets are telling us…

Millions of dollars worth of bets are placed every day on what the Fed will do about interest rates. These bets are placed on the Chicago Board of Trade (www.cbot.com).

Currently, the market is “predicting” no change in interest rates at this Fed meeting… or the next one…or the next one. In fact, the betting at the Chicago Board of Trade suggests that the Fed won’t raise – or lower – interest rates again in 2006.

Now we’ve got nearly five months left in the year. A lot can change, which can cause these bets to change. But right now, the Big Money is betting on no change for the rest of this year. You should plan for the same…

So what does it mean if the Fed is really done raising rates?

I asked our in-house number crunching guru Ian Davis to give me some hard numbers about the Fed’s actions and asset prices, and here’s what he came up with…

When the Fed is raising rates, stocks do poorly, rising at only 2% a year… which means stock prices are not even keeping up with inflation.

But when the Fed is cutting rates, stocks actually return 14.5% a year… a phenomenal return. You can see specifically what he did in the chart below:

DailyWealth: Federal Funds Rate Indicator

The bets on the Chicago Board tell us that the Fed is likely done raising interest rates for the rest of this year. However, the bets there DO NOT suggest when the Fed will start cutting rates again.

Asset prices (like the prices of stocks and real estate) CAN do well when the Fed is cutting rates. It makes sense – the cost of borrowing money is cheaper, so you can make more money in profits.

The trick is to be in the right trade.

That’s what we’re here for at DailyWealth… to help guide you into the best - and safest - investments, at the right time.

If you’re looking for a specific trade in the current interest rate environment, you ought to check out the latest issue of Porter Stansberry’s Investment Advisory

In it, Porter shows how interest rates on two-year bonds drop dramatically at this stage in the interest rate cycle. And he offers up a way to make 50% on your money in two years... with absolutely no risk to your investment.

It sounds too good to be true, but he’ll show you how it’s done. If you’re not yet a subscriber to Porter’s letter, you ought to check it out.

Good investing,

Steve

Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.

Sign up today to read more investment ideas from Steve Sjuggerud.

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THE STORM MAY BE OVER FOR FLORIDA REAL ESTATE

Longtime readers know St. Joe (JOE) is one of our favorite gauges of the Florida real estate market…

With 830,000 acres in the Florida panhandle, St. Joe is a national land giant, and the largest private landowner in the state. The stock tends to rise and fall with investor sentiment towards the Sunshine state.

Sentiment was rosy in 2003 and 2004, and JOE soared, hitting $84 a share. When folks decided they weren’t crazy for Florida real estate in mid-2005, shares were crushed, losing about 50% of their value.

It looks like the worst may be over for JOE… the stock has found a “floor” at $45 a share and is refusing to budge lower. If interest rate hikes are a thing of the past, the slide of JOE may be history as well.

A good sign for Florida land… St. Joe stops falling (3-year chart):

DailyWealth: St. Joe stops falling

-Brian Hunt


“The best time to buy bonds – especially short-term bonds, like 2-year bonds – are just as the Fed stops raising interest rates.

We recently have gotten the first economic signs that the Fed’s higher rates are having a big impact on the real economy. The housing market has nearly collapsed. GDP growth for the 2Q came in at a surprisingly weak 2.5%.

The Fed can’t afford to risk pushing us into a recession. So, I believe we’ve seen the last of this cycle’s rate hikes. The next Fed move will be towards lower rates. I bet they move to lower rates quickly either late this year or early next year.

And as soon as the Fed signals that they’re done hiking up the short end of the yield curve, 2-year yields will fall quickly down to the 3.5% range.

Anyone who is leveraged into 2-year bonds will do very well in the next six to 12 months.”

-Porter Stansberry’s
Investment Advisory

“I'm thinking that the Fed is playing its same old game - raise interest rates and appear to be fighting inflation -and simultaneously open the liquidity spigots and make money copiously available.

The one thing the Fed wants to avoid is a major collapse in housing. The Fed will do anything and everything it can to produce a ‘soft landing’ in housing.”

-Richard Russell,
Dow Theory Letters

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